In times of crises or the face of unprecedented events, most people are left floundering unable to react or deal with the prevailing environment. The world is currently going through one such event – the coronavirus and its spread across the globe. While it is a health crisis of the highest order, the contagion is also likely to have a deep impact on the economic landscape of the world. In recent history, another similar crisis that comes to mind is the 2008 financial crisis that caused a different kind of turmoil across the world and nudged many countries into recession. While such crises bring to the fore the importance of risk assessment and risk management, they also tell us that random events can happen. And when such events do happen, they can play an important role in our lives and the markets. Fooled by Randomness by Nassim Nicholas Taleb is an excellent book that makes this complex subject accessible. Taleb instructs us on how to account for randomness in our decision making and illustrates the many ways in which we confuse luck with skill.

Key takeaways from the Fooled by Randomness

• Luck, chance and randomness play an important role in our everyday life and financial markets. While difficult to account for, these factors can significantly influence our ability to make rational decisions and prepare for the future.

• The biggest hurdle in astute decision making is that people have a proclivity to make sense of the random. Generally, people try their best to justify random outcomes as non-random and rationalise chance outcomes as results of deliberate actions. This makes people have misled faith in their ability to accurately predict the future.

• One of the biggest things that we learned from the 2008 global financial crisis was that correlation in no way indicates causation. It only highlights the strength of a relationship and not the cause-effect phenomena. This means that just by looking at historical correlations, we cannot predict what might happen in the future.

• The rewards or returns that we earn are directly influenced by our performance and ability. The above-average ability can potentially generate above-average returns.

• When making financial decisions, it is imperative to take randomness into account.

The book concludes with a much-needed nod to heroes. According to Taleb, a hero is not just someone who emerges successful in the face of adversity but can someone who has the will and temerity to not allow randomness to affect his life and decisions. Whether in stock markets or life, exceptional people are often those who take extreme measures to reduce randomness in their situation.